Making Common Cents of Credit: A Common Sense Approach to Understanding, Managing, & Restoring Your Credit

By Franchesca Ross Jones and Edward Jamison

Making Common Cents of Credit pulls back the curtain to explain how it all works, and provides ready-to-use sample Credit Bureau Dispute Letters and detailed information on the Fair Credit Reporting Act (FCRA) and other laws that are designed to protect consumers.

• Language: English
• Publisher: BookBaby
• Release date: Mar 22, 2019
• ISBN: 9781543967234

Book preview

Score

CHAPTER 1

WHAT IS A CREDIT SCORE & HOW IS YOURS AFFECTING YOU?

Since you’re reading this book, it’s possible that you’ve recently been turned down for a mortgage, a car loan or a credit card and are already acquainted with the term credit score. If so, then you likely know that this simple 3-digit number is critical to your financial well-being and affects many aspects of your daily life.

WHAT IS A CREDIT SCORE?

The credit score is a number—an important one. It was designed to convey to lenders the kind of financial risk they’d be taking by having you as a customer. Think of it like a grade in school, only this grade rates you on how you have performed in your various financial obligations. Do you pay your bills on time? How much debt are you in? Have you kept your agreements on repaying loans in the past? What other kinds of financial or legal trouble have you had? By summarizing these considerations and more, the credit score becomes a quick and effective way for creditors to best decide whether lending you money right now is really a smart move, and if so, at what price.

WHAT ARE CREDIT SCORES USED FOR?

A common American dream is one of independence, entrepreneurship, and often homeownership. And yet few of us have the earning and saving capabilities to pay cash to buy a house or even a car, or to start our own business. Instead of settling for a lesser dream—like taking the bus, living in an apartment, or working for someone else all our lives—many of us choose to borrow money to take on our larger aspirations and then pay those loans back over time. As a nation, we have come to rely heavily on credit to live comfortably and to pursue our goals.

Creditors and other lenders have only been too eager to help. Their revenue is generated by making loans and charging interest on the money they lend. They need customers for their credit products such as mortgages, car loans, personal loans, business loans, and credit cards. But if creditors make loans to people who can’t pay them back, they lose money. Therefore, they need a reliable tool for evaluating their potential customers’ creditworthiness before extending them a loan. After many decades of being refined, this tool has evolved into today’s credit score. The credit score is not designed only by one company. In fact, there are several companies that make credit scoring software, but only one stands out above the others and is used to make more than 95% of all lending decisions in the United States—and that score is the Classic FICO®¹ credit score made by FICO® (formally named Fair Isaac Corporation until they recently changed their name to FICO®).

Because the soundness of the lenders’ decisions greatly affects their bottom line, the quality of your credit score can have a significant impact on which financial opportunities are open to you and the price you will ultimately pay for them.

HOW YOUR SCORE GETS GENERATED

Interestingly, you don’t have just one static credit score. You have many of them, and they are changing all the time. In fact, your score does not actually exist at any given point in time until a request is made for it and it is compiled by one of the companies that have been collecting and storing information about your financial interactions. The data, stored in an enormous database, has been provided to them by your creditors, and upon request is compiled into your credit report from the information these companies have on file, which is also the information that gets analyzed and then equated into your 3-digit credit score that tells the potential creditor the likelihood that you will have a major derogatory over the next 24 months. A major derogatory is a 90-day late payment or worse, any public record showing on your credit report, a collection, a repossession, a foreclosure, a settled account or a charge-off. The higher your score, the less the chance you will be one of those people to have a major derogatory over the next 24 months.

The credit score is a snapshot at a specific point in time of the information contained in your credit report, also called a credit history. It tells lenders your current credit status. Therefore, as new information is added to your credit report and other information gets deleted or drops off, your score fluctuates.

The companies that collect and maintain consumer credit data are referred to as consumer reporting agencies or credit reporting agencies (CRAs). They are also commonly referred to as credit bureaus. There are many consumer reporting agencies in the United States; however, there are only three major ones, commonly referred to as the Big Three. They are Equifax®, Experian®, and TransUnion™.²

A data furnisher, on the other hand, is any company that reports information to the credit bureaus. Among others, your creditors are data furnishers. Thus, every time you miss or are late on a payment to a creditor, that creditor has the option of reporting your delinquency to one or more of the three major credit bureaus. CRAs are in the business of gathering this information and selling it to creditors and others who are interested in how you have been handling your credit accounts.

HOW IT ALL COMES TOGETHER

When a lender is considering giving you a loan, they will request your credit history in the form of a credit report from one or all of the three major credit bureaus. Specifically, the credit report is a compilation of data that reflects how you have borrowed and repaid your debts, how timely you are paying your bills, and how much debt you currently have, among other things. By the time we reach adulthood, nearly every American will have a credit history with the three major credit bureaus.

Upon request, credit bureaus give their computer servers the instructions to pull together your report from the millions of bits of data in their database, based on the identifying information they have about you. The result is your credit report for that moment in time.

WHAT A CREDIT REPORT REVEALS ABOUT YOU

A credit report contains certain types of information and not others. For example, it has personal identifying information, such as your birth date, Social Security number, current and previous addresses, and present and former employers. Among the information not included in your credit report is your income, gender, national origin, race, or religion.

The report tells the history and status of many of your credit accounts, known as trade lines. It lists specific details about these credit accounts, including the date the account was opened, the type of account it is (whether revolving or installment, for example), if the account is open or closed, the amount of the required monthly payment, the maximum credit limit, the most ever owed at one time in the past on the account, the latest activity on the account, its current balance, and any amounts that are currently past due. The report also includes the addresses and telephone numbers of the creditors, if you’re lucky!

Each account listed also is assigned a code that reflects your payment history on the account. Are your payments current or are they 30, 60, or 90 days past due? Has the account gone so far delinquent that it has been charged off? Is there a repossession or other collection activity? The report will list accounts that have been turned over to a collection agency. In addition, a credit report will include certain public record information, such as court judgments, tax liens, and